The Outlook for Development and Investment in 2012

November 4, 2011

By Darren Donnelly

An overflow crowd showed up at Urban Land Institute British Columbia's annual networking breakfast in November to hear about North American real estate prospects for 2012 and where the Vancouver market fits. The Keynote Speaker was Jonathan David Miller, author of Emerging Trends in Real Estate® 2012.

Following Jonathan Miller's excellent presentation, Susan MacLaurin, Senior Vice-President of GWL Realty Advisors moderated a discussion focusing on the Vancouver market among Jonathan Miller, Gino Nonni, President, Wesgroup Properties, Andrew Bibby, CEO, Grosvenor Americas and Kevin Meikle, Senior Vice President, Cushman & Wakefield.

The Report

Keynote Speaker:

Jonathan Miller, author of Emerging Trends in Real Estate® 2012

According to ULI, Emerging Trends in Real Estate®, which is undertaken by ULI with PricewaterhouseCoopers, has a 33-year history and is the most widely-read forecast report for the North American real estate market. The report is intended to provide an outlook on investment and development trends, real estate, finance and capital markets, property sectors, metropolitan areas and other real estate issues, based on information gleaned from 950 interviews with industry leaders, including approximately 100 in Canada.

Jonathan Miller began by commenting on the general economic backdrop. He noted that Canada is in a better place than most countries in the world, pointing to strengths including our robust banking system, fiscally-sound government, plentiful natural resources and commodities and steady immigration. Having said that, he noted that economic activity across the country is expected to be generally muted, with low growth predicted for 2012.

The very broad outlook for real estate includes an abundance of equity capital and not much product available. Debt capital in Canada is available for established borrowers but lending criteria are expected to become more restrictive. Mr. Miller showed graphs indicating a trend moving from a relatively balanced market to one in which there are more sellers than buyers and he expects cap rates to flatten somewhat. Areas in which cap rates are expected to rise considerably would include suburban office parks and power centres as a result of a very strong trend to what he called "unbound urbanization"; that is, people, jobs, capital and activity generally moving back downtown in urban centres across North America and especially Canada.

In terms of markets to watch, Toronto is rated as the top real estate market in Canada and number 4 of 58 markets in North America. It trails only Washington, DC, San Francisco and New York City. Vancouver was a very close number 2 in Canada and number 5 in North America, just ahead of Seattle and Boston. Canada simply has no weak urban markets, in sharp contrast to the United States which has many.

With respect to product type, apartment buildings are regarded as by far the best investment type in North America and Canada and hotels clearly the weakest. Interestingly, according to buy/hold/sell responses of interviewees in the Canadian edition of the Report, the Vancouver apartment sector shows the highest percentage of respondents – at 19% – recommending selling, compared to only 6% for Vancouver industrial property.

Mr. Miller advised that housing development is very strong in Vancouver but is expected to level off somewhat in response to the tepid economy.

Commenting on Canadian "Best Bets" he pointed to the Report recommending that investors hold on to trophy assets, buy or hold infill land, and develop, with some caution, urban condominiums and offices.

Turning to the USA, Jonathan used a quote from the Report: "Don't let availability of capital clog judgments. Demand drivers don't exist and fundamentals need to catch-up." He observed that we have now entered the "Era of Less". The forecast generally is for restrained transaction activity in real estate. While most markets have stopped deteriorating, most have not really improved.

The "Best Bets" in the United States would be what the Report calls "Blue-Chip Gateways", which are the relative safe harbours such as San Francisco and New York City. It may be too late to buy in those markets, so holding is recommended. Owners should lock in low interest rates with long-term fixed-rate financing while it is still available. There are opportunities with portfolios of distressed debt, but it remains difficult to assess quality.

Panel Discussion

Moderator:

Susan L MacLaurin – Senior Vice President, GWL Realty Advisors

Panelists:

Andrew Bibby – CEO, Grosvenor Americas
Gino Nonni – President, Wesgroup Properties
Kevin Meikle – Senior Vice President, Cushman & Wakefield

After recognizing that the well-known panelists really required no introduction, Susan MacLaurin started things off by posing a relatively open-ended question on the Vancouver market to Andrew Bibby, who spends much of his time overseeing Grosvenor's activities outside of Vancouver. Andrew observed that prospects for the overall North American economy have dimmed, so places like Vancouver look better by comparison. The temptation then is to dive into anything one can get here. He thinks that's "probably okay, but don't borrow too much." Interest rates won't stay low forever and cap rates will go up eventually.

Susan interpreted the Report as stating that very dense condominium development is unsustainable generally and asked Gino Nonni if that comment applies to Vancouver. Gino believes that, while there are ups and downs of course, Vancouver growth is generally fairly stable and is not getting out-of-control for a couple of main reasons. For large projects, especially in the City of Vancouver, one impediment to "crazy growth" is the long process for approvals and the high level of amenities required. For example, his company's massive River District project (otherwise known as the East Fraser Lands) involves dedications of huge amounts of parkland, walking paths, public art contributions and many other amenities with the result that density is somewhat diluted. Gino also identified lending practices as another governor on "crazy growth". He says that borrowers need to demonstrate to their banks that they have more than a strong financial covenant, that they also have operational strength and still have to meet strict pre-sale requirements.

Susan noted that on a percentage basis, Vancouver has generated more jobs than Toronto and Montreal over the past one, five and ten-year periods, and more than Calgary over the last two years. She then asked "What are the engines of growth in Vancouver?" Kevin Meikle feels that Vancouver attracts "intellectual capital". He says the world finds us attractive and is curious which attracts leading engineers, architects and other creative professionals. Beyond that, Vancouver's economy is very broad-based having leading positions in the mining industry, transportation, logistics, innovative construction, information and communications technology, media and gaming technology and tourism. Andrew observed that Vancouver doesn't have big industrial drivers and that, in his view, it's really condominium development which is a huge driver of our economy, which largely results from the fact that we openly accept immigration. It worries him a bit that Vancouver is so dependent on that one factor but he notes that "China keeps coming and they will continue to keep coming". Jonathan Miller commented that Vancouver is a Gateway, which drives growth.

Susan followed up on the Gateway theme, asking the panelists which of the "24-hour Gateway Communities" which constitute "Wealth Islands" are their favourites? Andrew quickly identified San Francisco with its higher education, technology, vibrancy, immigration, dense forms of development and advanced transportation, allowing that Vancouver has many of those attributes and is "up there" too. Jonathan confirmed that those features listed by Andrew are indeed the definition of a 24-hour Gateway City. Gino agreed and opined that San Francisco "will skyrocket" when the economy picks up. He cautioned that in Vancouver we must be careful "not to drink our own Kool-Aid"; we must always be cautious of the possibility of a calamity such as was experienced in the early 1980's after interest rates reached ridiculous heights.

Kevin Meikle sees Vancouver as an oasis in the world. He sees that "everybody wants to be here", but because we are so small investors are only happy to come here to a certain point. For many of those investors, Vancouver is now just too expensive. The other panelists agreed.

Gino Nonni had the final word in response to a question from a panelist regarding condominium sales. Gino commented that his company, like other condominium developers, needs to work very hard on sales these days. Typically, they need to make four or five contacts with a buyer before a decision to buy is made and that today's condominium buyers in Vancouver are very informed.